CNBC Transcript: Warren Buffett on China, the Economy, and Corporate Jet Tax Breaks (Part 7)
This is part seven of an unofficial transcript of Warren Buffett's three-hour long live appearance on CNBC's Squawk Box this morning, Monday, November 14, 2011. (Click here for part six.)
Buffett revealed that Berkshire Hathaway has bought almost $11 billion worth of IBM common stock this year. He also said it is "not clear" that Europe has the will or ability to do "whatever is necessary" to fix its debt problems.
In these sections, Buffett talks about a variety of topics, including China, the U.S. economy, and tax breaks for corporate jets.
JOE: Welcome back. SQUAWK BOX here on CNBC—where's Warren?—first in business—we should just have him in a four box. He's a—he's such a part of—I'm Joe Kernen along with Andrew—oh, there he is—along with Andrew Ross Sorkin—there we go. Becky Quick is in Omaha with Warren Buffett.
JOE: We're going to get back to Warren in just a minute.
JOE: Anyway, let's get to Becky. And we probably should talk to Warren at some point, whenever you want, Becky, about China.
JOE: I read, I can't remember where it was, over the weekend—it was either in the weekend Wall Street Journal or The Times that there is—you can't help it, with the social media, 1.3 billion people are finding out more and more about property rights and freedom, and they're trying to figure out ways to censor a lot of this. I saw Gary Locke was over there. He's like a welcoming hero. He comes in there and people—they've—you know, when Huntsman was there, no one did anything.
JOE: But there's crowds showing up to see Gary Locke, and now the government is issuing all these press reports about `This guy,' you know, `he's a fake. He isn't—he is Chinese, but don't think that this is the way we should be.' And it's causing a lot of angst among the Chinese leadership that an American who is, you know, a couple of generations removed from China, is being so—sort of the adulation he's getting. So I don't know, we got to talk to Warren about whether that's really imploding at some point.
BECKY: Yeah, well, forget about all that. No, just kidding. Now that we've brought it up, why don't we go ahead and start on that? We've got some other stuff to talk to him about, too, and we'll recap some of the ground we've already covered over the last two hours. But Joe brings up a great point, Warren. When you start looking at what happened with the Arab Spring and you look at China and the country, the way it's been run to this point and the way it's very likely going to change, what do—what do you think? You've spent a lot of time in China recently, too.
BUFFETT: Yeah, well, I—I'm no great expert on it. I—they—they're going to have tensions within China just like we have tensions within this country. We—you know, our income disparities and the widening income disparity may cause a lot of tensions in the United States. Who knows? But China and the United States are going to be the two big factors in the world over the—over decades to come. And they'll be unhappy with some things we do when we tell them they can't buy Unical or something of the sort, and we'll be unhappy with things they do. There's things in our society that took us centuries, really, to get straightened out. I mean, you know, the 19th Amendment passed what, in 1920 or something like that.
BUFFETT: You know, blacks were three-fifths of a person. I mean, we—it took us a lot of time to work out things, and a civil war even in one case. So don't expect the progress of any huge society to be, you know, totally without some bumps here and there. But China and the United States, over time, will largely get along. We largely have the same interests. We both have nuclear bombs...
BUFFETT: ...so it's not in our interest to start getting really furious with each other. And there will be tensions. They'll—we'll want to play the game our way, and they'll want to play the game their way, and we'll both have to give in some cases.
BECKY: You know, I've been to China with you and with Boone Pickens in the past, and common threads for an American businessman going overseas, going to China is that, wow, it's a lot easier to get things done here.
BUFFETT: That's for sure.
BECKY: You can get through regulation quickly. The central planning is a big boost if you're trying to get something done very quickly. If that starts to be affected or impacted by the changes that are taking place in China, is China a less attractive investment area?
BUFFETT: Well, they will have more difficulty with that as they go along. But they do have—when they want to get something done and you get the government and business and labor all on the same page ready to do it, you'll build over there things in the period that would take us three or four times as long. And we've built factories over there and seen it happen.
So, as people get wealthy here, you know, they start casting their eyes about, and they don't get more satisfied. Sometimes they get more dissatisfied. That's happened in the United States. Right now we have six times the GDP per capita, in real terms, as when I was born. Now, I don't know whether people are happier now or more discontent or what than they were in 1930. But people have a way of adjusting very quickly to things becoming better, and then any little tiny adjustment downward they can get quite unhappy about. So they—they'll have—they'll have plenty of strains in their society, we'll have plenty of strains in our society.
BECKY: We should mention while we're talking about China that BYD shares—you may not have seen this yet, but they were up about 26 percent today on news that the Chinese government is making it a little easier for some of these new fuel vehicles that are out there.
BUFFETT: I didn't know that. Hm.
BECKY: Obviously, the BYD has been a very volatile investment, has been up and down and all over the place. Is it a good investment without the government pushing for some of these new-fuel economy—or new fuel vehicles?
BUFFETT: Well, Charlie's the expert on that, my partner Charlie Munger. But he would—I think he would answer that it would be—it would depend on how successful they are in perfecting certain technologies that he—that they're working very hard on. And he thinks that the—Wang Chuanfu, who runs that, is a—is a combination of Edison and Ford and who knows who else. And I—and the fellow has done remarkable things, so there's some—there are probably more remarkable things to be done, and there may be some remarkable things that can't be done, I don't know.
BUFFETT: But he—Charlie feels he's a very good bet.
BECKY: Joe, did you want to follow up on the China angle with that, too?
JOE: Oh, I mean, I—there's a couple of answers Warren gives I find a little bit unsatisfying, but I understand what he's saying. I don't know if I'd ever compare the income disparity issues that are front and center in this country with sort of what the Chinese people have to live with on a daily basis, Warren. It seems—but then again, they—it's a totally different culture. It's very—it's impossible for me to really—I've never been there, so I can't put myself in that place. Maybe it is a big a deal—as big a deal. I was thinking, you know, Tiananmen Square and bullets and total censorship and no property rights and 1/10th, maybe, the GDP per capita that we have, I—there's no way that I could ever say that our problems were in any way as bad as what some of the average Chinese have to put up with. That was what I was thinking, Warren, when you said that.
BUFFETT: Yeah, well, and I...(unintelligible).
JOE: I mean, I—seems to really minimize—I mean, sooner or later they're going to have a much bigger—want to have a much bigger say in their own lives than—I mean, we've got our problems, but I just can't imagine you'd say that it's similar to what—our income disparity's equivalent to the absolute human rights disaster in China right now.
BUFFETT: No, but we had our own human rights disasters. I mean...
JOE: Oh, I remember. I know.
JOE: I know. But we're talking about now.
BUFFETT: Yeah. Yeah, and they're—and—well, no, but I—but I would say they're really—they're really coming off 40 years, essentially, of a real history. I mean, for centuries they were stuck in the same place...
BUFFETT: ...and they are 40 years—they're 40 years into the life of what I would consider the present Chinese country. And 40 years into our country, you know, we had slavery, we—you know.
BUFFETT: We had a—we had a—so I wouldn't expect them to accomplish...
BUFFETT: ...in 40 years what it's taken us 200 years to accomplish.
JOE: But they're—but they're—it's being thrust upon them by technology. It—and they—you know, we—back during the Civil War we probably had—how long did it take to get news, you know, travel a couple of hundred miles? I mean, look the way—look what they're dealing with, right? They got 1.2 billion people that are coming right into the 21st century, boom, like that. And I just wonder whether that's a bigger problem for them to try to—to try to manage. But like I said, I think a lot of—a lot of people are happy with the pace of the progress already over there. And it is staggering how—I mean, you can't grow much faster than 10 percent a year.
BUFFETT: No, no. And we were—you know, we were 70 years into our country before we tackled a very big problem, and we tackled it in a very tough way. I—no, I—listen, all countries keep evolving, and I think we've evolved in—obviously in the right way over the years. But it took us a long time to do it in many—in many areas.
BUFFETT: Yeah, I changed my...
JOE: But if the Arab—if something like the Arab Spring ever did get started, though, I just don't know—but, you know, whether they—there's so many local, I guess, political officials there that are sort of—have a vested interest. I mean, one of—in that Gary Locke piece, I was amazed. The Chinese people were amazed that he would take a normal car, that he would wait in line to do something.
JOE: These bureaucrats in China are riding around in limos, their kids have Ferraris. I mean, there is still a lot of things that the Chinese people are—for Gary Locke to look like almost a—you know, a paragon of where they'd like to be someday, I mean, that shows that—you know, the entrenched political system over there has still got—I mean, there's going to be a day of reckoning.
BUFFETT: Yeah, well, there was a day of reckoning in—you know, in the South during the civil rights movement, you know, in the '60s, too, and that was 170 years after we started. And there was Bull Connor and—you know, and...
JOE: So where are you—where are you dating China's—I mean, they were—you know, they were a civilization long before we were.
BUFFETT: Yeah, but...
JOE: I mean, you know, you're giving them the benefit of—what, you're—Mao is when they started?
BUFFETT: Yeah, I—they were stuck. It's fascinating. I mean, they were as smart as we were, and they worked as hard and they went no place for centuries while this country, you know, went from nothing to 25 percent of the world GDP. Yeah, but we had a wonderful, wonderful system. There were flaws in it...
BUFFETT: ...but there—it was a wonderful system. It was a market system and equality of opportunity, rule of law, all these things we aspired to. And our aspirations led us into reality over time.
BUFFETT: But they really—the starting point with them is about 35 or 40 years ago.
BUFFETT: Before that they were basically a feudal society going no place.
JOE: This Niall Ferguson. I don't know if you got that book yet, "Civilization." But we just had him on talking about this, that for 500 years these crummy little Western countries just led the world when they should have killed us over in...
BUFFETT: Yeah. Right.
JOE: But now they've down—they've downloaded all of our killer apps, science.
BUFFETT: That's exactly right.
JOE: They had all the things that we've done. And now they're going to kick our butts and—because they've downloaded all...
BUFFETT: Well, they—no, I...
BUFFETT: I believe the first part of that but not the second part, yeah.
JOE: All right, wait, they're—Niall says the only way we can hope to compete is that the one thing that they haven't downloaded, and that's property rights and the rule of law, that that comes back to haunt them. And then on a—on a relative basis we'll still be able to do OK. But they've got some—with the other five they have downloaded, they're going to be a formidable force for the next 50 years, you'd think.
JOE: What's up, Andrew?
ANDREW: No, hey, Warren, just on this economic inequality bit—now you're looking at me funny, Joe—I know I was curious...
JOE: Oh, you always say that, that I'm looking...
ANDREW: No, what I was curious about was actually if you had a view and whether you were a supporter, ultimately, of the Occupy Wall Street folks. I think I saw that your son said that he was a supporter of the movement.
ANDREW: I should tell you, by the way, I went down and reported down in Zuccotti Park and asked somebody what they thought of the Buffett rule, and they asked me, `Who is Warren Buffett?' So I...
BUFFETT: Yeah. Well, they probably got a point there. No, I don't—it—that's not a huge factor. I mean, that—I don't even know, you know—I don't think anybody knows precisely what their major points would be or the leadership would be. That isn't what is going to change things. What—but it is a fact that in the last 25 years the Forbes 400 list has had its net worth increase nine for one, nine for one. In the last 15 years, it's increased over three for one. That is not happening with the American people generally, and it's happening during a time when those same rich people have had their tax rates go down, down, down. And I think that when we're talking to 312 million Americans about shared sacrifice and taking away things we promised to them—because we're going to have to do that. We're going to have to bring our expenditures down to 21 percent or so of GDP, and that's going to require a lot of sacrifice around the country, a lot of breaking of promises we've made. And I say that it's time for the ultrarich to share in that sacrifice to some degree. They won't even feel it. I mean, you change the Social Security rule somewhat and millions of people will feel it and they'll really feel it. You change the Medicare rules and millions of people will feel it. You get a minimum tax of 30 or 35 percent on incomes of a million or 10 million or over, truth is those people won't even feel it. But at least the American people, as a whole, will feel somehow that the ultrarich have been asked to participate to a small degree in this overall sacrifice that we're all going to be asked to participate in.
BECKY: Isn't that what Occupy Wall Street is all about, though, this feeling that there's a growing bridge between the haves and the have-nots?
BUFFETT: There—that's one of—that's certainly part of the feeling. But it's very hard to tell...
BUFFETT: ...because I never really heard anybody speak out and say, `These are the'—with the civil rights movement, I knew what it was all about.
BUFFETT: I'm not sure I know precisely what this...
BECKY: I guess there's not a leadership of Occupy Wall Street in the same sense.
BECKY: There's just this feeling of discontent.
BUFFETT: Yeah, well, I think the American people feel, generally—well, in fact, 76 percent of that in the—in the recent Wall Street Journal/NBC poll, 76 percent feel that it's wrong, what has happened in terms of the tilt in many ways, including the tax law toward the rich.
BECKY: Let's talk some more about what was found in that NBC/Wall Street Journal poll. Also, only 19 percent of those surveyed said that they think the country's headed in the right direction.
BECKY: And 47 percent—or I think it was 40 percent of them said that they think things are going to get worse.
BECKY: The worst is yet to come. And what does that tell you about the American people's sense of what's happening in the economy vs. what you tell us you're seeing in your companies?
BUFFETT: It's really fascinating, Becky, because it—that same poll—if you go back to October of 2008, when it was clear that—you know, we talked about on this—on this program that what was happening in the fashion world was going to hit into the business world huge. At that time, more people thought things were going to get better in six months than worse, in October 2008. Now they think things are going to get worse in the next six months. What has really happened in the last two years, and I'm seeing it in every bit of data I look at, is that the economy has generally kept moving forward. Business after business, you know, Dairy Queens to jet airplanes, it gets better. Except housing is in a depression. Now, you take housing and put it in a depression, not a recession, a depression, and that has a big impact and it—and it has a big psychological impact because everybody—you know, 66 percent of people live in their own homes, you know, and the person next door does if they don't. And then, you know, throw that on top of the unemployment figures...
BUFFETT: ...which I think are just disproportionately affected by what's going on in construction, and you can see why people—and then throw in what's happening in Washington, and people are discouraged. They'll get over it. I mean, that is not a permanent condition. But what you're saying does accurately reflect, I think, what the present mood is.
BECKY: You had told us earlier this year that you thought maybe we'd see a turn in housing by the end of this year.
BECKY: You're now saying it's not necessarily there just yet.
BUFFETT: It isn't there yet.
BUFFETT: Yeah, I was wrong.
BECKY: ...when do you see the turn at this point? Is it something that happens before a year from now when we're—when we're looking at a presidential election?
BUFFETT: Well, certainly the president hopes so. Yeah. It's—you know every day it's going in the right direction. When it turns, you know, I—obviously I thought you would see the turn by the end of this year, and you haven't. In a sense that's good. I mean, you would not want some artificial program in place that was causing extra housing starts now. That—it would just delay the solution. We don't—the nice thing about it is we're not Japan. We're not Italy.
BUFFETT: I mean, Italy has no population growth. We are a country where households are formed daily in significant numbers. There was a slowdown in 2009 because of the first impact of the recession, but households are getting formed every day faster than houses are being constructed. That solves itself. Now, it doesn't solve itself as fast as people would like...
BUFFETT: ...but it does solve itself. And the economy, which is good in many areas, will be very good when that—when that imbalance is worked off.
BECKY: OK, we're going to talk more about that. And Joe will also get back to the breaking news of this morning. Warren Buffett sharing with us earlier what he's been buying...
BECKY: ...not only over the last quarter, but earlier this year. We can talk more about that when we come back, too.
JOE: Great. OK, we'll do that, Beck. Thanks. Coming up, more from The Oracle.
BUFFETT ON WHY HE WANTS IBM TO GO LOWER
ANDREW: Let's get back to Becky who is in Omaha with the Oracle of Omaha. Becky:
BECKY: Hey, Andrew, thanks very much. We've been live with Warren Buffettall morning long. We've covered a lot of ground, but one bit of breaking news he gave us this morning is talking about what he's been purchasing over the last quarter and even before that. When the earnings came out, we knew that he had been spending a lot of money on equities and this morning Warren Buffettshared with us what exactly he's been spending, what the big part of that purchase has been. IBM, Big Blue, that's an investment that Buffet's been making and making it very handily. Up to this point he has invested just over $10 billion, 10 point...
BUFFETT: I'm not sure exactly. About probably 10.5, 10.6, something like that.
BECKY: All right, $10.5 or 10.6 billion. He now owns about 5 1/2 percent of the shares outstanding of IBM. And, by the way, this is news not only for our viewers but also for IBM. You have never spoken with IBM about the idea that you've been coming into that stock?
BUFFETT: I haven't talked to any—anybody at IBM whatsoever, or written to them or anything.
BECKY: So you say at this point you're about done, that you've bought what you want to buy at this point?
BUFFETT: I wouldn't be talking otherwise.
BUFFETT: That doesn't mean I want it to go up, though, because we do better if it goes down because they are repurchasing stock all of the time. And if they're going to spend $50 billion, some number that they announce in the next five years buying it, the cheaper they buy it the greater our interest goes up. Very simple. If you're a buyer of stocks, you want those stocks to go down. In fact, if I—if we had enough money coming in and IBM went down we might buy more.
BECKY: For those who have just been joining us over the last few minutes who didn't see in the last hour what you talked about, why don't you explain why you bought in to IBM because this is an unusual purchase. It's something that will come as a surprise.
BUFFETT: Well, I've been reading the annual reports for 50 years, I competed with them 50 years ago. I—but the 2010 report came in on a Saturday, I read it as I always do and instead of reading it through the old ones of glasses lens I read it through a new glasses lens and then I set out to learn more about it. They laid out some very specific things they expected to accomplish. I really compliment the management on that. I don't know of any large company that really has been as specific about what they intend to do and how they intend to do it as IBM. And they did that five years ago when they did it and they've done it since. So they...
BECKY: What are—what are some of the specifics?
BUFFETT: Well, they give you a road map and they spend—you can read dozens and dozens of pagers on—they explain it. You can go to their website and learn about it. But then I went out and—or people in the office did before me, and we looked at our own IT operations through many of our companies. We got lots and lots of companies. I don't—I don't know anything about the IT operations. But basically I was interested in learning how they came to the decisions they did, the stickiness, you know, what they might be doing three years from now or five years from now. And when I got all through I felt that IBM had a very good business and I felt that they had this terrific reverence for shareholders. They tell the—they're honest with their shareholders. They tell their shareholders what they expect...
BUFFETT: ...to accomplish. They expect to be held to it. They repurchase shares on a big scale. They do not use those repurchased shares. They go out and issue the same number of shares. They've taken down their overhang by 200 million shares. Now the base is a billion 180. They've done all kinds of things right.
BECKY: Andrew, I head you have a question, too?
JOE: Yeah, Andrew, go ahead.
ANDREW: Hey, Warren, I'm having a little bit of trouble with the IFB, but what is the average price that you paid for those IBM shares?
BUFFETT: Hundred and seventy roughly.
ANDREW: Hundred and seventy?
BUFFETT: Maybe just a touch under.
ANDREW: So it's trading at about 189—189 bucks now. So that's actually—and you started buying, you said, in April?
ANDREW: March. OK.
ANDREW: We had a couple—we had a couple of viewers write in to find out that answer.
BUFFETT: It takes—it takes a...
ANDREW: So there are people who are...
BUFFETT: It takes—it takes a long time to buy a lot of stock.
BECKY: Yeah. What do you think about the new CEO, Virginia Rometty?
BUFFETT: Well, I don't know her but I've—but I've read things she's said and they are batting a thousand in the last two CEOs they've come up with. So I've got no—and she's been—she's explained these plans that they have for the next five years. I have no reason to be anything other than positive.
BECKY: OK. Why don't we switch gears and talk a little bit about some of the other news that we've been focusing around the Capitol. Jack Abramoff, the disgraced lobbyist, is out with a new book, and he talks about how people on Capitol Hill, specifically congressional staffers, have been trading based on inside information that they know. Now it's not inside information that the SEC would necessarily crack down on, but do you think it's right that congressional staffers be trading on stocks when they know that there are investigations from some of their committees that are going into some of those companies?
BUFFETT: No, obviously it's wrong. I mean, I saw two different "60 Minute" programs.
BUFFETT: One last night that was on this trading. It focused more actually on people in Congress themselves on that one. Abramoff was—I mean, when saw him a week or go or so he was talking about the incredible power of lobbyists. And, of course, that gets into this whole question of why the rich have low taxes. I mean, you know, if there's a class war, you know, we're the ones that are waging it, the rich. And our soldiers are the—are the lobbyists. And the poor have a bunch of little toy soldiers and we've got these guys that have got the ins with the staffers and all that sort of thing.
BECKY: Administration after administration has promised that they would crack down on the lobbyists and lobbyists seem to be as powerful as ever.
BUFFETT: That's right. It serves the interests of the people on both sides.
BECKY: So what can be done?
BUFFETT: People have to get outraged enough that they hold congressional feet to the fire. But this system works for the people involved. It works for the—it works for the wealthy, it works for the special interests, it works for people in Congress and it works for the lobbyists. And it may not work for my cleaning lady, but, you know, what can she do about it?
BECKY: I guess one argument could be that if we actually saw a tax code that didn't have the exemptions that we have now that you'd be looking at a much better situation because the lobbyists are the ones who push for these exemptions and they're pushing on behalf of the powerful corporations and people.
BUFFETT: They're powerful and often rich. But powerful people. Sometimes they're powerful because they control a lot of votes, too.
BUFFETT: I mean, it doesn't have to be money. But it often is money.
BECKY: So is that an argument for a tax code that is stripped down the way Simpson and Bowles laid out?
BUFFETT: Well, it—you can go back to what, you know, Kemp-Roth and all of that, too that we were working on. But it—I think what happened with Simpson-Bowles was an absolute tragedy. I mean, here are two extremely high-grade people, they have somewhat different ideas about government. But they're smart, they're decent, they've got good senses of humor, too. They're good at working with people. They work like the devil for 10 months or something like that. They compromise, they bring in people as far apart as Durbin and Coburn to get them to sign on and then they're totally ignored. I think that's a travesty.
BECKY: Why are we starting over with a new congressional committee?
BUFFETT: Well, because we ignored the last one. You know, Congress basically has said put us in a position where something so unpleasant happens that it'll force us to do something we don't want to do. And the sequester is supposedly that. Now they talk about getting rid of the sequester if it—if action doesn't take place. People are sick of it. And it—it's pretty transparent what takes place. And democracy is messy, though. We will get to the—we will get to the answers eventually. We will not be spending 25 percent of GDP and raising 15 percent of GDP 10 years from now. We'll get there somehow.
But going back to the lobbyist question, you know, everybody in the country is trying to figure out how to have somebody else pay for it. But some of them are better equipped to fight that fight than others and they're the people with money that care and that hire lobbyists.
BECKY: Do we get to that point? You say eventually we'll get to a position where we figure it out and we're not spending 25 percent and bringing in 15 percent of GDP in revenue. Do we get to that position on our own or does it take a crisis like we've seen in Greece or Italy to make the United States government sit up and actually pay attention?
BUFFETT: It probably takes a general feeling in Congress, and maybe in the administration that they've got more to lose by sticking with the old system if nothing happens and stalemate than they have of finally getting something done. In other words, it takes a feeling that incumbents are going to get turned out unless they get some action.
BECKY: We're not there yet.
BUFFETT: I don't know. We may be—we may be getting close. I think that's what incumbents are worried about now.
JOE: Hey, Warren...
BECKY: All right.
JOE: ...listening—I don't know whether we got to take a break—we got to take a break? We don't have to take a break—we do? All right. All right, if we have to, we have to. But, all right, then I'll hold my thought. But it has to do with what you were just talking about. When we come back with more Warren Buffett we will continue this conversation. SQUAWK will be right back.